As previously detailed in a prior Eversheds Sutherland legal alert (the Prior Alert), on April 9, 2020, the Federal Reserve unveiled the “Main Street Lending Program” (Program) which will make loans available for small and medium-sized businesses impacted by the COVID-19 pandemic. After considering more than 2,200 comment letters submitted on the initial terms of the Program, the Federal Reserve announced updated terms for the Main Street New Loan Facility (New Loan Facility), Main Street Expanded Loan Facility (Expanded Loan Facility) and terms for a new Main Street Priority Loan Facility (Priority Loan Facility).¹ We refer to these three facilities together as the “Main Street Facilities.”

Term sheets for the Main Street Facilities are available here: New Loan Facility; Expanded Loan Facility; and Priority Loan Facility. The Federal Reserve’s Frequently Asked Questions (FAQs) for the Program are available here.

Are BDCs able to lend under the Program?

Business development companies (BDCs) and other non-bank lenders are not currently permitted to serve as eligible lenders under the Program: only banks are permitted to make loans under the Program. The Federal Reserve, however, stated in the FAQs that it is considering options to expand the list of eligible lenders, indicating that BDCs may potentially be able to participate in a future iteration of the Program.

As discussed in the Prior Alert, we believe that the Federal Reserve should permit BDCs, a significant funding source for many U.S. middle-market companies, to serve as eligible lenders under the Program. BDCs originate loans to middle-market companies on a day-to-day basis, and they have the resources necessary to provide valued intellectual, as well as financial, capital to these borrowers. If permitted to serve as lenders under the Program, BDCs could use their knowledge of, and experience with, these middle-market borrowers to assist in achieving the best possible outcomes during this crisis.

What fundamental updates were made to the Program? 

Fundamental updates made to the Program include, but are not limited to, the following:

• Expanded size of eligible borrowers:  Borrowers with up to 15,000 employees or up to $5 billion in annual revenue are now eligible to borrow under the Program (increased from 10,000 employees and $2.5 billion in revenue). To determine eligibility, a borrower’s employees and 2019 annual revenue are calculated by aggregating the employees and 2019 annual revenue of the borrower itself with those of the borrower’s affiliated entities in accordance with the affiliation rules of the Small Business Administration (SBA).
• Addition of the Priority Loan Facility: The newly added Priority Loan Facility allows borrowers to have greater leverage (six times the borrower’s 2019 EBITDA compared to four times the borrower’s 2019 EBITDA under the New Loan Facility) subject to increased risk sharing by lenders (retention of a 15% interest compared to a 5% interest for loans made under the New Loan Facility and the Expanded Loan Facility).
• LIBOR index rate: Loans under the Program will be made at an adjustable interest rate of London Interbank Offered Rate (LIBOR) + 300 basis points (changed from Secured Overnight Financing Rate (SOFR) + 250-400 basis points).
• Secured and unsecured terms loans: New Loan Facility and Priority Loan Facility will include both secured and unsecured term loans (changed from only unsecured term loans under the New Loan Facility). Expanded Loan Facility will also include both secured and unsecured term loans as well as revolving credit facilities.
• Addition of ineligible borrower restrictions:  Borrowers that are excluded from participating in SBA loan programs under existing SBA regulations, including financial businesses primarily engaged in the business of lending and life insurance businesses, are not eligible to participate in the Program.²
• Adjustment to EBITDA for maximum leverage calculation:  Lenders and borrowers are permitted to use the borrower’s adjusted 2019 earnings before interest, taxes, depreciation and amortization (EBITDA) (changed from the fixed definition of EBITDA).
• Tax distributions exempt from distribution restrictions: S corporations and other tax pass-through entities will be permitted to make distributions to the extent reasonably required to cover their owners’ tax obligations in respect of the entity’s earnings.
• Minimum loan size under New Loan Facility and Priority Loan Facility: The minimum loan size for borrowers under the New Loan Facility and Priority Loan Facility is now $500,000 (decreased from the New Loan Facility’s prior minimum size of $1 million).
• Minimum and maximum loan size under Expanded Loan Facility:  The minimum loan size under the Expanded Loan Facility is now $10 million (increased from $1 million) and the maximum loan size is the lesser of $200 million and 35% of outstanding and undrawn available debt (increased from $150 million and 30%, respectively).
• Lender’s assessment of financial condition:  Eligible lenders must conduct an assessment of each potential borrower’s financial condition at the time of the potential borrower’s application.

Who is eligible to borrow a Program loan?

To be eligible to borrow under the Program, a borrower must: 

• have (a) 15,000 or fewer employees or (b) $5 billion or less or annual revenue in 2019;
• be a for-profit entity established prior to March 13, 2020;
• not be “ineligible” under the SBA’s affiliation rules;
• be created or organized in the United States or under the laws of the United States with significant operations in and a majority of their employees based in the United States;
• not participate in the Private Market Corporate Credit Facility³  or receive funding pursuant to Subtitle A of Title IV of the Coronavirus Economic Stabilization Act of 2020 (CARES Act) regarding emergency relief to distressed sectors, including airlines and businesses important to maintaining national security; and
• be deemed financially sound by the lender at the time of the borrower’s application.

For clarity, borrowers that have participated in the SBA’s Paycheck Protection Program (PPP) are also eligible to participate in the Program. 

Borrowers are required to make commercially reasonable efforts to maintain payroll and retain employees during the time the loan is outstanding, “in light of [their] capacities, the economic environment, [their] available resources, and the business need for labor.”⁴ Borrowers that have already laid-off or furloughed workers due to the disruptions from COVID-19 are eligible to apply for loans under the Program.

Who is eligible to provide a Program loan?

Eligible lenders under the Program include U.S. federally insured depository institutions (including banks, savings associations, or credit unions), U.S. branches or agencies of foreign banks, U.S. bank holding companies, U.S. savings and loan holding companies, U.S. intermediate holding companies of foreign banking organizations, or U.S. subsidiaries of any of the foregoing.

As discussed above, non-bank lenders, such as BDCs, are not currently eligible to serve as lenders.

How is the Program structured?

Under the Program, the Federal Reserve Bank of Boston will commit to lend to a single common special purpose vehicle (SPV) on a recourse basis. The U.S. Department of the Treasury (Treasury) will make a $75 billion equity investment in the SPV using funds appropriated to it under the Exchange Stabilization Fund under Section 4027 of the CARES Act. The Program will cease participations on September 30, 2020, unless extended by the Treasury and the Federal Reserve, but the SPV will continue to be funded until its assets mature or are sold.

The SPV will purchase up to $600 billion of participations in loans under the Main Street Facilities. The Treasury and the Federal Reserve noted that they continue to assess the financial strains faced by borrowers and may adjust the Program’s size in the future.  

What are the general terms and conditions of loans available under the Main Street Facilities?

Each loan will have a four-year maturity, with principal and interest payments deferred for one year after the loan is disbursed; will be made at an adjustable interest rate of LIBOR (one or three month) + 300 basis points; and may be prepaid without penalty. Loans under the Program are full-recourse loans and the principal amount cannot be reduced through loan forgiveness.

New Loan Facility

• New loans ranging in size from a minimum of $500,000 to a maximum of the lesser of (a) $25 million or (b) an amount that, when added to the borrower’s existing outstanding and undrawn available debt, does not exceed four times the borrower’s 2019 adjusted EBITDA.
• As noted, no principal is paid in the first year. The loan will be amortized over its remaining term, with one-third of principal due at the end of each of the second and third years, and one-third due at maturity at the end of the fourth year.
• The loan is not, at the time of origination or at any time during the term of the loan, contractually subordinated in terms of priority to any of the borrower’s other loans or debt instruments.
• The SPV will purchase at par value a 95% participation in the loan. The SPV and the lender will share risk in the loan on a pari passu basis. The lender must retain its 5% of the loan until it matures or the SPV sells all of its participation, whichever comes first.
• Any existing loan that the borrower had outstanding with the lender as of December 31, 2019 must have had an internal risk rating (based on the lender’s risk rating system) that was equivalent to a “pass” in the Federal Financial Institutions Examination Council’s (FFIEC) supervisory rating system as of that date.

Priority Loan Facility

• New loans ranging in size from a minimum of $500,000 to a maximum of the lesser of (a) $25 million or (b) an amount that, when added to the borrower’s existing outstanding and undrawn available debt, does not exceed six times the borrower’s 2019 adjusted EBITDA.
• As noted, no principal is paid in the first year. The loan will be amortized over its remaining term, with 15% of principal due at the end of each of the second and third years, and 70% due at maturity at the end of the fourth year.
• The loan is, at the time of origination and at all times the loan is outstanding, senior to or pari passu with, in terms of priority and security, the borrower’s other loans or debt instruments, other than mortgage debt.
• The SPV will purchase at par value an 85% participation in the loan. The SPV and the lender will share risk in the loan on a pari passu basis. The lender must retain its 15% of the loan until it matures or the SPV sells all of its participation, whichever comes first.
• At the time of the origination of the loan, a borrower may refinance its existing debt owed to a different lender (i.e., not its eligible lender under the Priority Loan Facility).
• Any existing loan that the borrower had outstanding with the lender as of December 31, 2019 must have had an internal risk rating (based on the lender’s risk rating system) that was equivalent to a “pass” in the FFIEC’s supervisory rating system as of that date.

Expanded Loan Facility

• Eligible lenders may upsize an existing term loan or add a new term loan tranche under an existing revolving credit facility.  To qualify, the existing term loan or revolving credit facility must have a remaining maturity of at least 18 months.
• Upsized loans ranging in size from a minimum of $10 million to a maximum of the lesser of (a) $200 million; (b) 35% of the borrower’s existing outstanding and undrawn available debt that is pari passu in priority with the loan and equivalent in secured status (i.e., secured or unsecured), or (c) an amount that, when added to the borrower’s existing outstanding and undrawn available debt, does not exceed six times the borrower’s 2019 adjusted EBITDA.
• As noted, no principal is paid in the first year. The loan will be amortized over its remaining term, with 15% of principal due at the end of each of the second and third years, and 70% due at maturity at the end of the fourth year.
• The SPV will purchase at par value a 95% participation in the upsized tranche of the loan. The SPV and the lender will share risk in the loan on a pari passu basis.  The eligible lender under the Expanded Loan Facility must be one of the lenders that holds an interest in the underlying loan at the date of upsizing, and such eligible lender must retain its 5% of the upsized tranche of the loan until the upsized tranche matures or the SPV sells all of its participation, whichever comes first.
• The upsized tranche is, at the time of upsizing and at all times the upsized tranche is outstanding, senior to or pari passu with, in terms of priority and security, the borrower’s other loans or debt instruments, other than mortgage debt.
• The existing term loan or existing revolving credit facility must have had an internal risk rating (based on the lender’s risk rating system) that was equivalent to a “pass” in the FFIEC’s supervisory rating system as of December 31, 2019.

What are the transaction and origination fees under the Main Street Facilities?

For loans under the New Loan Facility and the Priority Loan Facility, lenders will pay the SPV a transaction fee of 100 basis points of the principal amount of the loan at the time of origination, although lenders may require borrowers to pay this fee. In addition, borrowers will pay lenders an origination fee of up to 100 basis points of the principal amount of the loan at the time of origination.

For loans under the Expanded Loan Facility, lenders will pay the SPV a transaction fee of 75 basis points of the principal amount of the upsized tranche of the loan at the time of upsizing, although lenders may require borrowers to pay this fee. In addition, borrowers will pay lenders an origination fee of up to 75 basis points of the principal amount of the upsized tranche of the loan at the time of upsizing.

Are borrowers required to make certifications under the Program?

Borrowers will be required to make certain certifications, including the following:

• borrower will not repay the principal balance of, or pay any interest on, any debt until the loan is repaid in full, unless the debt or interest payment is mandatory and due;
  • Note: However, as discussed above, the Priority Loan Facility permits a borrower to refinance its existing debt owed to a different lender at the time of the origination of the loan.
• borrower will not seek to cancel or reduce any of its committed lines of credit with the lender or any other lender;
• borrower has a reasonable basis to believe that, as of the date of the origination of the loan and after giving effect to such loan, it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that time period;
• borrower will follow the executive compensation, stock repurchase and dividend and other capital distribution restrictions applicable to direct loans under the CARES Act, except that a borrower that is an S corporation or other tax pass-through entity may make distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings. These restrictions require that for so long as the loan is outstanding and for one year after repayment, the borrower must agree to the following:
  • for any employee whose 2019 total compensation exceeded $425,000, total compensation for any 12-month period may not exceed 2019 total compensation levels, and severance will be capped at two times 2019 total compensation; 
  • for any employee whose 2019 total compensation exceeded $3.0 million, total compensation for any 12-month period may not exceed the sum of (i) $3.0 million plus (ii) 50 percent of the excess over $3.0 million that the employee made in 2019;
  • borrower cannot repurchase equity securities; and
  • borrower cannot pay dividends or make other capital distributions; and
• borrower will certify to its eligibility to participate in the Program, including in light of the conflict of interest prohibition in Section 4019(b) of the CARES Act, which prohibits certain governmental officials from participating in various federal lending programs.

Are lenders required to make certifications under the Program?

Lenders will be required to make certain certifications, including the following:

• lender will not request that the borrower repay debt extended by the lender to the borrower, or pay interest on such outstanding obligations, until the loan (or upsized tranche) is repaid in full, unless the debt or interest payment is mandatory and due, or in the case of default and acceleration;
• lender will not cancel or reduce any existing committed lines of credit to the borrower, except in the event of default; 
• lender will certify that the methodology used for calculating the borrower’s adjusted 2019 EBITDA for the loan’s leverage requirement is the methodology it has previously used for adjusting EBITDA when extending credit to the borrower or similarly situated borrowers on or before April 24, 2020; and
• lender will certify to its eligibility to participate in the Program, including in light of the conflict of interest prohibition in Section 4019(b) of the CARES Act, which prohibits certain governmental officials from participating in various federal lending programs.

Next Steps

Although the Program is not yet operational, the Federal Reserve stated that a start date would be announced soon.⁵ The Main Street Facilities’ term sheets note that the Board of the Federal Reserve (Board) and the Treasury may make further adjustments to the Program, with any changes to be announced on the Board’s website. As discussed above, we believe that the Federal Reserve should expand the list of eligible lenders under the Program to permit BDCs, a significant funding source for many U.S. middle-market companies, to serve as eligible lenders.

------------------------------------------

¹ Press Release, Board of Governors of the Federal Reserve System, Federal Reserve Board announces it is expanding the scope and eligibility for the Main Street Lending Program (Apr. 30, 2020, 10:00 AM) (Press Release).
² An ineligible business is a type of business listed in 13 CFR 120.110(b)-(j), (m)-(s), as modified by regulations implementing the PPP on or before April 24, 2020.
³ The Primary Market Corporate Credit Facility was established by the Federal Reserve to support credit to large companies for bond and syndicated loan issuance.
⁴ FAQs at 14.
⁵ See Press Release.

[View source.]